While the Federal Reserve doesn’t directly set mortgage rates, it influences them by making changes to the federal funds rate, the interest rate that banks charge each other for short-term loans. The Fed’s decisions alter the price of credit, which has a domino effect on mortgage rates and the broader housing market.
“When the Fed raises interest rates to slow the economy, rate-sensitive sectors like tech, finance and housing typically feel the impact first,” said Alex Thomas, senior research analyst at John Burns Research and Consulting. It’s important to keep an eye on what the Fed does: Its decisions affect your money in multiple ways, including the annual percentage rate on your credit cards, the yield on your savings accounts and even your stock market portfolio.
What factors affect mortgage rates?
Mortgage rates move around for many of the same reasons home prices do: supply, demand, inflation and even the employment rate. Additionally, the individual mortgage rate you qualify for is determined by personal factors, such as your credit score and loan amount.
Economic factors that impact mortgage rates
- Policy changes from the Fed: When the Fed adjusts the federal funds rate, it spills over into many aspects of the economy, including mortgage rates. The federal funds rate affects how much it costs banks to borrow money, which in turn affects what banks charge consumers to make a profit.
- Inflation: Generally, when inflation is high, mortgage rates tend to be high. Because inflation chips away at purchasing power, lenders set higher interest rates on loans to make up for that loss and ensure a profit.
- Supply and demand: When demand for mortgages is high, lenders tend to raise interest rates. The reason is because lenders have only so much capital to lend out in the form of home loans. Conversely, when demand for mortgages is low, lenders slash interest rates in order to attract borrowers.
- The bond market: Mortgage lenders peg fixed interest rates, like fixed-rate mortgages, to bond rates. Mortgage bonds, also called mortgage-backed securities, are bundles of mortgages sold to investors and are closely tied to the 10-Year Treasury. When bond interest rates are high, the bond has less value on the market where investors buy and sell securities, causing mortgage interest rates to go up.
- Other economic indicators: Employment patterns and other aspects of the economy that affect investor confidence and consumer spending and borrowing also influence mortgage rates. For example, a strong jobs report and a robust economy could indicate greater demand for housing, which can put upward pressure on mortgage rates. When the economy slows and unemployment is high, mortgage rates tend to be lower.
Personal factors that impact mortgage rates
The specific factors that determine your particular mortgage interest rate include:
- Your credit score.
- The home’s location.
- The home’s price.
- Down payment.
- The loan amount.
- The type of interest rate.
Is now a good time to shop for a mortgage?
Even though timing is everything in the mortgage market, you can’t control what the Fed does.
However, you can get the best terms available by making sure your financial profile is healthy while comparing terms and rates from multiple lenders. Regardless of the economy, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payments.
“Buying a home is the largest financial decision a person will make,” said Odeta Kushi, deputy chief economist at First American Financial Corporation. If you’ve found a home that fits your lifestyle needs and budget, purchasing a home in today’s housing market could be financially prudent, Kushi noted.
However, if you’re priced out, it’s better to wait. “Sitting on the sidelines may allow a potential buyer to continue to pay down their debt, build up their credit and save for the down payment and closing costs,” she said.
The bottom line
When the Federal Reserve adjusts the benchmark interest rate, it indirectly affects mortgage rates. The Fed’s rate cuts will help home loan rates improve, though it won’t be dramatic or immediate. Mortgage rates will also respond to inflation, investor expectations and the broader economic outlook. Experts predict that mortgage rates should continue going down in the last months of 2024.
